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Czechs to introduce notional DC system

CZECH REPUBLIC - The Czech Labour Ministry wants to start to reform the current pension system by introducing a so-called Notional Defined Contribution (NDC) system.

The Ministry's representatives made the announcement last week at a conference on pension reform organized in Prague.

The NDC model calls for the creation of individual national accounts that will allow all employees to see how much they've contributed to their pensions, and how high their pensions will be.

The model also includes a mechanism for adjusting clients' assets over the years based on changes in wages and provisions for adjusting eventual pensions based on changes in life expectancy and trends in economic growth during the retirement years.

The Ministry, which hopes to submit a draft of the reform by the end of 2003, says the new system will be fully functioning before 2010. The Czech pension system will be transformed just gradually, over the course of 20 years. The new system is expected to affect only Czechs who are now 40 and under, while pensions of older Czechs will continue to be paid according to the current pay-as-you-go system.

Further details on the NDC and the pension reform are to be discussed in the first quarter of 2004. The government says its aim is to introduce a stable and fair system that will also allow Czechs to decide when they will retire.

As in other European countries, the Czech Republic must amend its pension system due to an ageing population which results in a distorted ratio of pensioners to those who work.

The 2001 census showed that Czechs' average age rose to 39 in 2001 from 36.5 in 1991, and is expected to rise to 46 by 2030. The state can hardly get more from companies contributing to the pension system. At present, Czech firms must pay social insurance worth 35% of gross wages, which is one of the highest levels in Europe.

The Czech Republic made the first step to reform the system in September 2003 when the country's Parliament amended the bill on pension insurance that hiked retirement age. As of 2013, Czech men and women without children will retire at the age of 63, compared to 61 now.

The pension system reform has the support of many Czechs. According to recent polls, over two-thirds of Czechs believe the pension system must be reformed in some way. As many as one quarter of Czechs already save additional funds with one of the country's 12 private pension funds.




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